Your firm needs a machine which costs $90,000, and requires $30,000 in maintenance for each year of its 5-year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 35% and a discount rate of 13%. What is the depreciation tax shield for this project in year 5?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual depreciation using the MACRS 5-year table. According to the table, the depreciation percentages for each year are:

Year 1: 20.00%
Year 2: 32.00%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%

So the depreciation in year 5 is (90,000 x 11.52%) = $10,368.

The depreciation tax shield is the tax savings that result from the depreciation deduction. It is calculated as the depreciation amount multiplied by the tax rate. So the depreciation tax shield in year 5 is:

10,368 x 35% = $3,628.80

Therefore, the best choice is C, with a depreciation tax shield of $3,628.80 in year 5.

Your Firm Needs a Machine Which Costs $90,000, and Requires